Thought Leadership:
CTRM or Not?
What You Should Know

Why Doesn’t Every Commodity Trading Company Have a CTRM?
If CTRMs are so crucial for commodity trading firms, why doesn’t every company have one?
What are the reasons companies hesitate to implement a CTRM?
Answer:
Most firms hold back because of perception, the belief that implementing a CTRM will be too difficult and disruptive to their already over-stretched team. It has become not a question about cost, but more of confidence.
Top Barriers to CTRM Adoption


Complexity Vs Requirements
A start-up company in early growth mode, handling only a few transactions a month, using basic pricing terms, with straightforward back-to-back deals, might not need the full functionality of a CTRM. In fact, they may prioritise deal flow, client acquisition and supply chain stability over system sophistication.
At this stage spreadsheets can be the best solution for a firm, who are not actively hedging and have low exposures. However, as the company grows, and trade count and complexity increase, the disadvantages are…

- No audit trail or change history to track data modifications
- Lack of business control, such as user permissions and approval workflows
- Lack of integrated security features
- Increasingly time-consuming to manage as trade count and complexity grow
- Reliance on multiple spreadsheets owned by different individuals, each requiring manual updates
- High risk of errors, including duplicate entries, inconsistent data across spreadsheets and unverifiable accuracy
- Business processes can be delayed if the responsible spreadsheet owner is unavailable
- Vulnerability to accidental overwrites, with formulas overwritten with fixed values or pasted incorrectly without warnings or permission
- No version control, making it hard to track changes or revert to previous states
- Data can be sorted, filtered or hidden by users without notifying others, leading to misinterpretation of overall exposures
- Challenges in generating accurate reports, including regulatory and compliance reports
- Difficulty demonstrating creditworthiness, controlled process and risk strategy to banks and stakeholders which could lead to difficulties getting trade finance lines
Modern CTRMs now offer scalable, modular solutions. This opens the door for start-up companies to benefit using a CTRM from day one of their operations.


ERP is already implemented
An Enterprise Resource Planning, ERP, solution, such as SAP or Microsoft Dynamics, are designed to serve a wide range of industries, including retail and manufacturing. These systems often offer additional modules to support specific business functions. However, ERPs are not built to handle the specialised and complex requirements of the full trade lifecycle in commodity trading.
While ERP’s are tightly integrated with accounting processes, they often fall short in capturing the nuances of commodity trading. This simplified approach may help with basic cost management but lacks the flexibility to manage complex pricing structures and optionality. As a result, trades with variable pricing are often entered as fixed price, requiring continual manual updates.
This limitation forces users to rely on assumptions and approximations outside of the system, often with the aid of multiple spreadsheets. Furthermore, ERPs struggle to provide a clear view of overall exposure. For example, managing a physical price exposure hedged with a financial swap is difficult to track with an ERP. These gaps hinder an organisation’s ability to manage risk and run a commodity trading business in an efficient and optimised manner.
ERPs often lack the specialised book structures and reporting hierarchies required by trading firms, making effective reporting and control challenging. In addition, they typically offer limited risk analytics and inadequate risk reporting capabilities, which hinders both risk management and clear communication with stakeholders.
Last but not least, ERPs often lack the capability to manage complex logistics workflows typical of commodity trading, such as efficiently and transparently handling vessel logistics, railcars, trucks, storage operations, blending and the associated risk and controls.


Change Management Challenges
Employees who have become used to spreadsheets or legacy applications may resist adopting a new system, often due to not having the time or motivation to learn a new method to accomplish their day-to-day activities. They fear it is simply too disruptive to their daily operations. These challenges are often addressed when the users appreciate:
- Learning how to use the CTRM takes hours (not weeks), see previous news article on Training
- Most CTRM vendors offer free 1-2-1 training
- CTRM is user friendly, built for traders, operators, back office… not just for IT
- Using a CTRM would free up considerable amount of their time every day

Implementation Burden
CTRM software no longer has a reputation for being difficult to implement with long, time-consuming, and expensive implementations. Modern CTRM implementations now take 12-weeks or less, see our previous news article on Implementations.



No Infrastructure
CTRMs now offer a cloud-based solution requiring no upfront hardware investment. Everything is maintained by the vendor with new features automatically deployed for free as soon as available.

Integration Complexity
CTRMs often integrate with other systems, such as accounting and market data feeds. If the system has previously been integrated, then this process is normally quick for a new CTRM to also hook into. The client should provide the CTRM vendor with a full list of existing integrations who will then analyse and provide a timeline for delivering, which can often be achieved within the standard out-of-the-box implementation period.


Market Segment
It is true that CTRMs are geared towards physical commodity flows, however companies who deal in purely financial instruments, such as prop trading firms and hedge funds, can also benefit from adopting a CTRM with automatic deal entry, price exposure, VaR, audit and reporting capabilities.
Trading niche physical commodities is no longer a barrier to adopting a CTRM due to their flexibility and customisation available.


Cost
Incorporating a CTRM involves costs that include software user licensing fees or subscription fees, the cost of implementation services (third-party and/or internal), system customisations, data migration, integrations with existing systems, and staff training.
Although the precise payback period for a CTRM investment depends on many factors including the chosen software, the firm's characteristics, and the scope of implementation, most organizations can anticipate a timeframe of approximately 12-months. A shorter payback period may be attainable through prudent vendor selection, favouring cloud-based solutions requiring minimal customization, and through effective implementation management.

Afraid of Being Locked into a CTRM Vendor
Having the flexibility to exit the vendor relationship if you're not satisfied, rather than being locked into a five-year contract, significantly limits your potential downside. Rolling one-year contracts give you greater control and reduce the risk associated with choosing a CTRM vendor.
Benefits
The fact is that having a commercial and robust CTRM offers a myriad of business benefits as well. These include potentially greater efficiency, manual error reduction, confidence in financial results, more auditable and trustworthy operations, improved risk management, improved automation and so much more.
These days, banks and other stakeholders, including regulators, want to see adequate controls, reporting and risk awareness. If things do go wrong, they want the ability to understand why and mitigate in the future. This simply cannot be done with spreadsheets and rather requires a proper commercial solution with security, workflow, audit trails, and other controls. Why risk your reputation – and credit worthiness by not having a CTRM?

Conclusion
Modern CTRMs are changing the game, opening their client base to a broad range of clients. No longer are only multi-national, multi-commodity, established physical trading companies using CTRMs. In fact, firms of all sizes are deploying CTRMs even from their launch with low transaction volumes and limited pricing/operational complexity.
So, if you think you’re not ready for a CTRM, or don’t possibly have the time, think again…
